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Explain the GIPS rules for calculating composite returns, including the permitted ways of asset-weighting the returns of member portfolios

CFA® Level III · Performance Measurement · Overview of the Global Investment Performance Standards · L3.PF.3.e

The idea

A composite's return must be asset-weighted, using each portfolio's beginning-of-period value, or beginning value plus weighted external cash flows, or the aggregate method, which treats all member portfolios as one and computes a single return from their combined assets and flows. For periods from 2010 onward, composite returns must be calculated at least monthly and linked geometrically. With two portfolios starting at 20 million and returning 5%, and 80 million returning 2%, the composite return is 0.2 × 5% + 0.8 × 2% = 2.6%. An equal-weighted average would show 3.5%, overstating what the typical dollar earned because the small account happened to do better. Equal-weighted results may appear only as supplemental information. Membership follows the firm's documented inclusion and exclusion policies.

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